Monday, December 29, 2008

ITC - Best stock to buy in cigarettes business - Major in FMCG too

With three out of four cigarettes consumed in India coming from its stable, ITC is a clear leader in the business. Together with paper, agri commodities and hotels, these businesses generate annual cash flow of Rs 3,600 crore.The last two years though have cigarette volumes remain under pressure (down 2-3 per cent in H1, FY09) thanks to adverse changes in duty rates (excise duty raised, VAT imposed in FY08, duty on non-filter cigarettes introduced). Even then, ITC has managed to grow its sales and profits in this business, led by cost cutting measures, upgrading customers to filter-cigarettes and price hikes.

On the other hand, ITC has been deploying its cash flows towards promising businesses like non-cigarette FMCG (processed foods, personal care, etc). Even as they are in nascent stages and continue to report losses, ITC’s consolidated profits have steadily risen (except in H1, FY09, when they were flat due to a 35 per cent rise in other expenditure to Rs 1,612 crore). These losses are expected to decline in the coming quarters, as most of the product launch expenses (reflected in other expenditure) are through.

Importantly, cigarette volumes are seen rising by 2-5 per cent in FY10 and rub off positively on ITC’s profitability; sufficient to offset the recent pressure in the hotel business (9 per cent of profits). The paper business (11 per cent share in profits) is also expected to do well, due to easing of raw material prices and expanded capacities. Overall, with improving prospects in the FMCG business (cigarette and others; accounts for 76 per cent of profits), expect ITC to deliver healthy earnings, and the stock to return 18-20 per cent.Source: Business Standard

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